California Senate Bill 642 (“SB 642”) cleared the California Senate Health Committee on April 28, 2021. If enacted, SB 642 would, among other things, significantly impact management and governance rules applicable to California medical practices.     

Overview of SB 642

SB 642’s general theme is the preservation of independent clinical judgment by physicians, building on California’s current prohibitions on the corporate practice of medicine and Attorney General oversight of certain health care transactions. As presently drafted, SB 642 would:

• Prohibit hospitals from imposing certain policy and practice limitations on their medical staffs;  

• Impose limitations on certain contractual arrangements between professional medical corporations and entities owned by non-physicians, such as corporations and private equity investors; and

• Provide the California Attorney General with the ability to consider certain additional factors when approving transactions involving California nonprofit health facilities.   

Each of these aspects of the proposed legislation are briefly discussed below. 

Hospital Governing Boards and Medical Staffs

The primary goal of SB 642 is to prevent hospital governing bodies in California from making decisions impacting the care provided at hospitals by members of hospital medical staffs based on financial and other non-clinical considerations without the approval of the medical staff. Subject to certain exceptions, SB 642 would prohibit health care facilities from limiting or otherwise exercising control over the independent professional judgment of a physician or surgeon concerning the practice of medicine or the diagnosis or treatment of a disease, if the physician or surgeon determines that a particular medical service or treatment is medically appropriate.

Management Service Organization (MSO) Arrangements

Likely of interest to health care providers that rely on medical practices for core clinical services, along with corporate and private equity stakeholders, SB 642 would require that shareholders, directors, and officers of a medical corporation “manage” and have “ultimate control” over the assets and business operations of the medical corporation. It further provides that the shareholders, directors and officers of a medical corporation may not be replaced or removed (regardless of the circumstances) at the direction of non-physicians. If passed in its current form, SB 642 could deny medical practices the opportunity to contract with management and administrative services providers. These changes could deprive medical groups of resources that permit them to maximize the time they spend focusing on patient care and reduce investment funding resources into the California health care sector. As SB 642 does not provide “grandfathering” protection for existing arrangements in its current form, it could disrupt existing health care arrangements involving management or administrative support services across California. 

More Attorney General Discretion to Approve Certain Health Care Transactions

SB 642 also provides the Attorney General with expanded review and approval rights for transactions involving California nonprofit health care providers. These expanded rights include the power to consider whether a transaction may result in (i) the reduction in the availability or accessibility of health care services to groups of individuals protected under California’s Unruh Civil Rights Act, or (ii) undue influence in patients’ access to medical care due to improper or unlawful motives when deciding whether to approve the transaction. Expanded Attorney General oversight and regulation of health care transactions has been a reoccurring issue on California’s legislative agenda. However, as discussed in our prior alerts (available here, here and here), those larger attempts to impose additional regulation have thus far not been successful.

What Might Some Health Care Stakeholders, Providers and Investors Consider Doing Now?

• Consider reviewing closing conditions and post-closing covenants in potentially impacted health care transactions to help ensure that structures are put in place that will materially comply with applicable legal requirements and that obligate the parties to cooperate in post-closing measures that may be needed to ensure compliance with the law post-closing to the extent the law may change.

• Ensure parties to an impacted contractual arrangement and/or transaction (particularly, MSO arrangements) are clear about the scope of any potential or actual change in the law, and what kind of providers and arrangements are within or outside the scope of potential changes.

• Hospitals and health systems with health care operations that are governed by ethical and religious directives or similar directives and guidelines may wish to revisit and assess to what extent compliance with directives are addressed and adopted by the medical staff.

Conclusion

With the potentially far-reaching changes that could result from SB 642, we recommend California health care providers and stakeholders pay close attention to this piece of proposed legislation and consider whether an investment of time and money, either alone or with allies, may make sense to monitor this proposed legislation more closely, engaging appropriate advisors and other resources as needed.